Consumer Spending 2008 / 2009

Readers Question: i was wondering if u could give me some insight on how these macroeconomic factors will affect household consumption in 2008/2009. thanks

Consumer Spending in the UK

This graph shows the strong correlation between consumer spending and economic growth. Since 2005, consumer spending has continued to increase at an average of about 3%

 Factors that Will Affect Consumer Spending in 2008/09

1. Interest Rates 

With high levels of debt in the UK (see debt UK), any change in interest rate will have a big impact on consumer spending. If interest rates fall, mortgage holders will face lower mortgage payments therefore they will have more disposable income. Interest rates are forecast to fall, therefore this could maintain reasonable levels of consumers spending however:

• due to credit crunch many banks are not passing on B of England base rate cuts to their customers.
• The bank have hinted interest rates may not fall very much, because of rising cost push inflation.
• Lower interest rates may not boost spending if other factors have a stronger impact in detering spending

House Prices.

Rising house prices have encouraged consumer spending in the past decade. Rising house prices encourage higher confidence and equity withdrawal through remortgaging.

This graph shows that equity withdrawal has contributed to higher consumer spending. If house prices fall then this equity withdrawal will dry up leading to lower consumer spending. Falling house prices will also have a significant bearing on consumer spending. It is uncertain how much house prices will fall by. Some people predict house price falls of 20%. But, personally I feel the shortage of supply and low interest rates will keep house prices fairly stagnant. (house prices continue to fall)

3. Difficulty of Borrowing.

The credit crunch is making it more difficult to borrow money. E.g. number of mortgages on offer is falling. 125% and some 100% mortgages have been removed. However, I don’t think this will be a major effect on consumer spending. It is not as dramatic as the media make out and most people don’t rely on 125% mortgages to finance their spending. More significant is the fact many banks are trying to increase their profit margins, meaning interest rate cuts are not being passed on.

4. Wages

Wage inflation remains relatively subdued, especially in the public sector. This will help limit consumer spending as consumers will not be increasing spending by borrowing more. Minimum wage is to be increased in line with inflation

5. Price of Oil / Food / Council tax

Increase in the price of commodities will tend to increase the cost of living for many people leading to lower discretionary income and will limit consumer spending to some extent.

Predictions Consumer Spending and Economic Growth 2008/09

I would expect consumer spending to slow down by the end of 2008 to about 1.5%. I think the MPC will be reluctant to cut rates, they would rather have lower spending than allow inflation to increase. I also think the housing market is particularly significant for UK consumer spending and whilst that remains in the doldrums consumer spending growth will remain weak. However, at the moment, I do not see the UK entering a recession.

Sources

• graph on consumer spending low pay commission 
• Problems facing UK economy – debt